HMV(LON: HMV) has become the latest retailer to warn on Christmas sales.
The group reckons it is unlikely to make more than £70m pre-tax profit this year, compared to City hopes of around £89m.
According to Simon Fox, HMV’s new chief executive, the main problem is a dearth of exciting new music out there this year. The value of the UK music market fell 14% during October and November as creaky old comeback attempts from the likes of Take That and George Michael dominated the charts.
But there’s a lot more to HMV’s problems than that…
We actually predicted HMV’s profit warning a couple of issues ago, in our round-up of the retail sector.
Yes, we’re sure the music market is pretty poor at the moment. But it goes a lot deeper than that. HMV’s profit warning came just after market researcher Footfall reported that shopper numbers are down 8.9% on last year.
The real problem facing HMV is that with broadband internet access rapidly becoming the norm rather than the exception, people just don’t need music shops (or book shops, for that matter). Why fight your way through the grim Christmas shopping hordes to queue for half an hour to buy a DVD or book, when you can go online from the peace of your house or office and get it more cheaply? You can even get it delivered direct to the recipient, saving the hassle of going to the post office too.
Then of course, there’s Tesco. It might not have the same range as Amazon, but if it’s just the latest Number One you’re looking for, the supermarket can pile them high and sell them cheap. Again, if you’re in there hunting for your turkey and mince pies anyway, why would you choose to buy Take That’s latest magnum opus from HMV instead?
The music retailer is being forced to slash prices to compete with the likes of Amazon and the supermarkets, but that’s having a painful impact on profits and is ultimately unsustainable.
So it’s hard to see how there can be anything but tough times ahead for the group. But it’s not just the likes of HMV that should be concerned.
Interest rates look to be very much on the upward path for next year. The markets are already expecting rates to rise to 5.25% in February, but several commentators, including the Royal Institution of Chartered Surveyors (Rics) are starting to entertain the thought of 5.5% at some point.
Although minutes from the Bank of England’s latest rate-setting meeting showed that all nine members voted to keep rates at 5% in December, a majority looked keen to hike again if data warranted.
And with mortgage lending hitting its highest ever last month, according to the Council of Mortgage Lenders, it seems unlikely that the Bank will be able to justify keeping rates on hold for much longer.
Of course, as Damian Reece points out in The Telegraph, higher interest rates alone may not have the effect of slowing rampant borrowing. The public sector is now responsible for such a large chunk of economic production that “it is fiscal rather than monetary policy which is having a major impact on growth and, to a lesser degree, inflation.” And with Gordon Brown seemingly incapable of reining in his spendthrift ways, it seems likely that the public sector push will continue.
“What will really put paid to the consumer debt boom is when lenders to both households and companies finally realise that the economy’s future is rather more rocky than anticipated, and turn off the credit tap.”
When will that be? That’s the million-dollar question, of course. But consumers are faltering under the weight of the debts they already have. With bankruptcies and repossessions rising, the possibility of more businesses warning in HMV’s wake seems high. And once confidence in the consumer goes, lenders may be less willing to extend such favourable terms to them in the future.
Turning to the stock markets…
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In a day of light trading in London, the FTSE 100 closed 5 points lower, at 6,198, well off an intra-day high of 6,240. Mining stocks weighed as copper hit a six-month low and gold and silver were also weaker. However, Barclays led the banking sector higher following its acquisition of Uganda’s Nile Bank.
On the Continent, the DAX-30 closed 33 points higher in Frankfurt as steelmaker ThyssenKrupp benefited from talk of consolidation in the sector. In Paris, the CAC-40 was boosted by a wave of M&A deals, ending the day 29 points higher, at 5,514.
On Wall Street, stocks closed lower despite early momentum from M&A activity as the energy sector was hit by a natural gas sell-off. The Dow Jones closed 7 points weaker, at 12,463. The Nasdaq ended the day at 2,427, a 1-point fall. And the S&P 500 closed 2 points lower, at 1,423.
In Asia, a weaker yen helped Japanese exporters, lifting the Nikkei 36 points to a close of 17,047.
Crude oil was 45c lower this morning, last trading at $63.27, whilst Brent spot was at $61.84 in London.
Spot gold had fallen as low as $619.60 in London this morning, down from $621.70 in New York last night.
And in London this morning, shares in medical equipment maker Smith & Nephew leaped nearly 7% on news that the private equity owners of US rival, Biomet, are planning a bid for the firm. The possible bid was revealed to The Business by ‘a source close to the deal’. Smith and Nephew shares had risen by as much as 27.25p today.
And our two recommended articles for today…
The Dogs of the Dow: an investor’s best friend
– Now is the perfect time to buy high quality stocks on the cheap, as followers of the ‘Dogs of the Dow’ strategy will know. But remember – this is a strategy to follow long-term, not just for this Christmas. For more on why ‘dogs’ can bring you great returns, read: The Dogs of the Dow: an investor’s best friend
Top ten threats to the global status quo in 2007
– As 2006 draws to a close, Jeremy Batstone of Charles Stanley is feeling bearish on the global economy. He highlights the nine economic trends to watch – and one slightly less serious development. To find out what trouble lies ahead – and how to invest accordingly – see: Top ten threats to the global status quo in 2007